Mortgage Rates Jump as Fed Stops Buying

April 01st, 2010

The Federal Reserve’s program to buy up mortgage-backed securities (MBS) has ended, creating a void in market that may lead to higher mortgage rates. Newly released housing and economic data could also indicate future mortgage rate trends.

Here are items in the news this past week that impact your loan applications for refinance mortgage or purchase mortgages.

Mortgage Rates Jump as Fed Stops Buying

The morning of April 1 was no joke in the mortgage rate markets–the day opened with a steep drop in MBS prices, which means a rise in mortgage rates. The primary cause for the increase was the end, the day before, of the Fed’s mortgage purchase program. After purchasing $1.25 trillion in mortgages over the past year and a half, the Fed program ended on March 31. On the first morning of trading following the end of the program, the void in the buyers’ side of the market was quite noticeable, and mortgage rates jumped.

Looking forward, unless other buyers come to the MBS market to pick up the slack in demand left by the Fed, mortgage rates will likely continue to rise.

Home Values Flat

On March 30, the latest Case-Shiller Home Price Index figures were released. Case-Shiller breaks its index into a 10-city survey and a 20-city survey. In the 10-city survey, home values were down only 0.2% in January 2010 from December 2009 and flat (no change in home values) from January 2009. In the 20-city survey, home values declined 0.4% from December 2009 and declined 0.7% from the prior year. These numbers show a firming up of home prices across the country, and four major markets in the survey that have been some of the hardest hit in the housing crisis–Los Angeles, San Diego, Phoenix, and Las Vegas–all showed price increases from January 2009 to January 2010.

This flattening of home values, with only slight declines, is good news for housing markets, improving appraisals for refinance mortgage applications and slowing the number of Americans going underwater on their mortgages.

Mortgage Applications and Mortgage Rates Up for Week

On Thursday, the Mortgage Bankers Association (MBA) released its Weekly Applications Survey, which gives an early indicator of the future direction of housing markets. For the week ending March 26, 2010, total mortgage applications increased 1.5%, mostly due to an increase in purchase mortgage applications. Refinance mortgage applications declined, falling to 63.2% of total applications.

Also in the survey, the MBA announced that the average mortgage rate for a 30-year fixed-rate purchase mortgage at a 80% loan-to-value ratio increased to 5.04% from 5.01% and the cost increased to 1.07 from 0.76 percent of the mortgage amount for origination costs, including points.

These two trends–refinance mortgage applications dropping as a percentage of total mortgage applications and a rise in mortgage rates–are expected to continue.

Economic Data Positive

US economic data releases looked promising for a continued recovery from the recession. Initial unemployment claims released on Thursday–439,000 first-time filers for unemployment benefits–were lower than the prior week for the third week in a row. Consumer confidence increased in February, and consumer spending in February 2010 was flat compared to the prior year rather than declining.

As the economy improves, pressure will be on the Federal Reserve to increase interest rates to control creeping inflation. If you are considering a refinance mortgage in the near future, you may want to speed up the process; markets may have hit or passed the bottom of the mortgage rate curve.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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